Marco Rubio and Mike Lee's Tax Plan Is a Setback for Tax Reform

March 16, 2015

Marco Rubio and Mike Lee’s long awaited tax plan, which the senators released two weeks ago, hits many traditional conservative goals like eliminating capital gains taxes, consolidating tax brackets and reducing the corporate rate, along with a major expansion of the Child Tax Credit (CTC).

The plan received positive reviews from many on the right, and a moderately positive one from me. Though the plan would balloon the deficit and the CTC expansion would leave out low-income and non-traditional families, I wrote that Rubio and Lee "have put forward a credible, conservative tax proposal that could lay the groundwork for comprehensive tax reform in the future."

On further thought, the plan's main weaknesses are far worse than I originally acknowledged.

Rubio-Lee is indeed a credible, conservative tax plan. For the last six years, Republicans have been offering unrealistic tax plans. Herman Cain's 9-9-9 plan would have imposed a 9 percent tax on transactions, a 9 percent income tax, and a 9 percent sales tax. Mitt Romney's tax plan in the 2012 presidential election would have cut all tax rates by 20 percent and cut the capital gains rate for all but the richest Americans while making up the revenue by closing unspecified tax breaks. Both of those plans would have been incredibly regressive. But Cain and Romney both insisted their plans would be deficit neutral, which appeared mathematically impossible. Romney and Cain's tax plans were completely detached from the realities of our tax system. They were all about politics, an attempt to convince GOP primary voters that they could fulfill impossible conservative goals.

In many ways, Rubio-Lee is a more conservative plan than those two. For instance, it eliminates the capital gains tax altogether. The same goes for the estate tax. But Rubio and Lee at least made their plan mathematically realistic: They dropped the pretense that they could be deficit neutral, and admitted that the plan will cut revenues by trillions of dollars in the first 10 years. That makes Rubio-Lee less a political plan than a legitimate policy document.

But a deeply flawed document, too. As New York's Jonathan Chait writes, Rubio-Lee is a massive tax cut for the rich. Lee's original tax plan—the one he released 18 months ago, before he teamed up with Rubio—would have cut taxes on more than 80 percent of households in the top income quintile, according to the Tax Policy Center. But in the bottom quintile, three-quarters of households would have seen little change in their taxes. Most of the benefits would have gone to the rich. The new plan tilts those benefits even further in the direction of the rich because it eliminates the tax on capital gains altogether.

Conservatives typically dismiss liberal concerns about revenue levels by saying that it’s easy to bring in more money by changing rates or adding tax brackets. Technically, they’re right. Conservative economist Scott Sumner, who thinks Chait and other liberals are overreacting to the plan, suggests an additional 50 percent tax bracket on all income over $250,000. Sumner says this "little tweak" should garner support across the aisle because it raises more revenue and makes the tax code more progressive—the two biggest concerns liberals have with the Rubio-Lee plan.

But Sumner far underestimates the magnitude of this tweak. The Tax Foundation’s static score of Lee-Rubio finds that the plan would have to raise about $4 trillion in extra revenue over the next decade to make the plan deficit-neutral. If the senators reformed their plan to raise another $4 trillion from the rich, it would certainly make the plan far more appealing to liberals—but it would also alienate conservatives who support it. Meanwhile, Rubio has said that his goal is not to make the plan more progressive but to eventually get to a flat tax altogether.

When Lee released his plan the first time, many on the left and right were hopeful that with some moderate reforms, the plan could form the foundation of comprehensive tax reform. “[N]otably, Lee himself didn’t respond by, say, denouncing TPC and insisting that some version of dynamic scoring would make the deficit numbers come out right; he responded by announcing that he was partnering with Marco Rubio (cough, 2016, cough) to develop a revised family-friendly proposal,” Ross Douthat, the conservative columnist for the New York Times,wrote a year ago after the Tax Policy Center scored Lee’s original plan as increasing the deficit by $2.4 trillion over 10 years. “So there’s the possibility for evolution here, potentially.”

Instead of an evolution on the revenue front, Lee and Rubio devolved, as Douthat acknowledged last week. Unlike with Lee’s first proposal, and contra Sumner, there are no little tweaks that can make the numbers look better in this plan. It may be mathematically possible but only because Lee and Rubio changed the rules of the game. That’s not progress towards comprehensive tax reform. It’s a setback.